Buffered And Floor Annuities ("BFA")

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Solve For Equity Replacement And A Level Of Principal Protection In Down Markets

You may want to consider using a BFA to replace some of the equity portion of your overall asset allocation plan to help reduce downside portfolio risk.

Each indexed account option is a combination of:

(1) the protection option you select - the Buffer or Floor, 

(2) the index you select - the S&P 500 Index, Nasdaq-100 Index, Russell 2000 Index, etc.,

(3) the crediting method you select - Cap, Performance Trigger Rate, etc., and

(4) the time period (term) for measuring the index performance you select.

Protection Options

​Buffer

Buffers provide downside protection from loss up to a stated amount. They are designed to provide you with a level of risk protection over a contract term to help lower your portfolios exposure to risk. 

The most popular buffers offered based upon the performance of the S&P 500 Index over a 1-year term are:

> 10% Buffer

> 15% Buffer

> 20% Buffer

> 100% Buffer

The insurance company will protect against the specified percentage loss ("buffer") during the selected term - and you will be exposed to any losses greater than the buffer during the selected term. 

For example, if you select a 1-year term with a 20% Buffer based upon the performance of the S&P 500 Index:

Scenario 1 - S&P 500 Index decreases between 0.00% and the Buffer 

The insurance company absorbs the entire loss, your principal is fully protected from loss for the 1-year term. For example, if the S&P 500 Index loses 19%, then the insurance company will absorb the entire 19% loss and you will lose 0%.

Scenario 2 - S&P 500 Index decreases more than the Buffer

The insurance company absorbs the first 20% of the loss and you will lose the difference for the 1-year term. For example, if the S&P 500 Index loses 30%, then the insurance company will absorb the first 20% of the loss, and you will lose 10%. 

​Floor

Floors provide downside protection from loss after a stated threshold. They are designed to provide you with a level of risk protection over a contract term to help lower your portfolios exposure to risk.

The most popular floor offered based upon the performance of the S&P 500 Index over a 1-year term is:

> 10% Floor

You will be exposed to any losses up to the specified percentage loss ("floor") during the selected term. The insurance company will protect against losses below the floor during the selected term. 

For example, if you select a 1-year term with a 10% Floor based upon the performance of the S&P 500 Index:

Scenario 1 - S&P 500 Index decreases between 0.00% and the Floor 

You will incur the entire loss for the 1-year term. For example, if the S&P 500 Index loses 8%, then you will lose 8%.

Scenario 2 - S&P 500 Index decreases more than the Floor

You will lose an amount up to the floor and the insurance company will absorb all losses above the floor. For example, if the S&P 500 Index loses 30.00%, then you will incur the first 10& of the loss, and the insurance company will absorb all losses in excess of the floor, in this case 20.00%. 

Solve For Equity Replacement In Up Markets

Depending upon the crediting method you select, BFAs offer a "cap" or a "performance trigger rate" option, etc.,  that provide you with a level of performance when the market goes up.

BFAs may be appealing if you are willing to forego the 100% principal protection that fixed index annuities offer in exchange for potentially higher returns than fixed index annuities offer.

Crediting Methods

Cap

Caps provide you with the potential to earn a portion of the increase in an index over a contract term.  

For example, if you select a 1-year term with a 11.75% Cap based upon the performance of the S&P 500 Index:

​(1) If the S&P 500 Index gains any amount equal to a greater than 11.75% for the contract term, then you will earn 11.75%.

(2) If the S&P 500 Index gains any amount from 0% to 11.75% for the contract term, then you will earn the same percentage of interest that the index gains. For example, if the index gains 5.00% for the contract term, then you will earn 5.00%.

​Performance Trigger Rate

Performance trigger rates provide you with the potential to earn a specified percentage if the index gains any amount equal to or greater than 0% over a contract term.

For example, if you select a 1-year term with a 10.80% Performance Trigger based upon the performance of the S&P 500 Index:

(1) If the S&P 500 Index gains any amount equal to or greater than 10.80% for the contract term, then you will earn 10.80%.

(2) If the S&P 500 Index gains any amount from 0% to 10.80% for the contract term, then you will earn 10.08%. For example, if the index gains 5.00% for the contract term, than you will earn 10.80%.

No single indexed account option consistently delivers the best return under all market scenarios and performance will vary depending upon market conditions. *

* Most insurance companies charge no annual fee on BFAs (if no Income Rider is attached). Advisor fees may be deducted and paid quarterly, in arrears, based upon the market value of the Assets on the last day of the current quarter.

Solve For Tax-Deferred Growth

If you purchase a BFA in a non-qualified account (for example, assets held in individual or joint accounts) - you don't pay taxes on the gains until gains are withdrawn - so your gains can grow and compound tax-deferred for as long as you want.

Also, unlike Traditional IRAs, 401(k)s and other retirement vehicles, BFAs do not have mandatory Required Minimum Distributions ("RMD") so you can enjoy the benefits of compounded tax-deferred growth for as long as you wish.

When BFAs mature, they can be renewed or exchanged to another BFA or other type of annuity without tax consequences to defer income until later in retirement when you may be in a lower tax bracket and withdrawals may be taxed at a lower rate at such time.

May Help Reduce Taxes On Social Security Income

When you begin taking Social Security, potentially up to 85% of your Social Security benefits may be subject to income tax depending upon:

(a) the amount of your Social Security benefits,

(b) the amount of income you earn, and

(c) the sources of your income during retirement.

Important Notes 

(1) Interest on savings accounts, CDs, money market mutual funds, taxable bonds and municipal bonds is included in Provisional Income, the IRS calculation threshold above which social security income is taxable.

(2) BFA gains can compound and grow tax-deferred and be excluded from the Provisional Income calculation until gains are withdrawn.

(3) By moving some of your funds into a BFA, you may be able to help reduce taxes on your Social Security income by reducing your Provisional Income calculation.

Following are three detailed examples that illustrate how BFAs with buffers, floors, caps and performance trigger rates work.

Example 1:

BFA with a 1-Year Term, 20% Downside Buffer and 11.75% Upside Cap

Example 2:

BFA with a 1-Year Term, 15.00% Downside Buffer and 9.00% Upside Performance Trigger Rate

Example 3:

BFA with a 1-Year Term, 10.00% Downside Floor and 14.50% Upside Cap

Following is a summary of key features and benefits that BFAs offer:

A Level Of Principal Protection

BFAs are indexed-linked variable annuities and can lose value. However, unlike traditional variable annuities that can lose unlimited value, BFAs provide a level of protection from stock market down turns.

BFAs are issued by life insurance companies and guarantees are backed by the financial strength and claims paying ability of the issuing insurance company. We work with only the highest rated insurance companies in the industry. BFAs are regulated by FINRA and the SEC. *, **, ***

BFAs Provide A Level Of Protection Against Sequence Of Returns Risk as you near or are in retirement, which may lower your stress level, and give you more Peace Of Mind.

BFAs Can Become Part Of Your Equity Allocation To Help De-Risk Your Investment And Retirement Income Portfolio

Indexed Account Options

You can combine different indexed account options. Index Account Options can be changed at the end of each indexed account option term throughout the life of the contract.

Indexed account option buffers, floors, caps, performance trigger rates, etc., are subject to change each indexed account option term.

Contract Terms

The majority of BFA terms range from one, three or six years.

Gains And Losses Permanently Locked In At The End Of Each Index Account Option

Contract Term Throughout The Life Of The Contract

Gains can be automatically added to your BFA contract to compound and grow tax-deferred… or… gains can be sent directly to your bank account.

Some BFAs will allow you to lock in the performance up to the cap at any point during a term if the cap is reached before the end of the term.

Penalty-Free And Systematic Withdrawal Options

Some BFA contracts allow you to withdraw up to a specified percentage of principal each year during the life of the contract without being subject to an early surrender charge (if applicable).

Flexible Funding

BFAs can be funded with a lump sum and, in addition, allow you to add money over time.

Can Be Purchased In IRA, Roth IRA and Non-IRA Accounts ****

Your Gains Can Compound And Grow Tax Deferred In Non-IRA Accounts

BFA gains compound can grow tax deferred in non-qualified accounts (for example, assets held in an individual or joint account) until the money is withdrawn.

When BFAs mature, they can be renewed or exchanged to another BFA or other type of annuity without tax consequences to defer taxes until later in retirement when you may be in a lower tax bracket and distributions may be taxed at a lower rate. ****

May Help Reduce Taxes On Social Security Income

When you begin taking Social Security, potentially up to 85% of your Social Security benefits may be subject to income tax depending upon:

(a) the amount of your Social Security benefits,

(b) the amount of income you earn, and

(c) the sources of your income during retirement.

Important Notes 

(1) Interest on savings accounts, CDs, money market mutual funds, taxable bonds and municipal bonds is included in Provisional Income, the IRS calculation threshold above which social security income is taxable.

(2) BFA gains can compound and grow tax-deferred and be excluded from the Provisional Income calculation until gains are withdrawn.

(3) By moving some of your funds into a BFA, you may be able to help reduce taxes on your Social Security income by reducing your Provisional Income calculation. *****

Some BFAs Offer Income Riders That Can Be Attached For Future Guaranteed Lifetime Income

May Avoid Probate

Any remainder in your BFA may potentially pass efficiently outside of probate and be paid directly and discreetly to your beneficiaries (not the insurance company) within weeks after all required paperwork is received in good order. That allows your loved ones to bypass the long, painful and costly probate process - saving them time, court costs, administrative costs and legal fees.*****

If you should die before liquidating a BFA, your beneficiaries will get the remaining value of your BFA as a death benefit – not the insurance company!

Create A Legacy That Lasts

Spousal Beneficiaries And Inherited BFAs

The taxes your spouse may owe will be dependent upon the distribution option he or she chooses when they inherit your BFA. Any taxes owed on distributions are deferred until he or she receives them.

Qualified (IRA) Annuities

A spousal beneficiary may elect to:

(a) receive a one-time lump sum payment; 

(b) keep the buffered annuity in your name, continue enjoying the benefit of compound tax-deferred growth, and take out RMDs using his or her life expectancy or a payout option that provides income for a specified period of time;

(c) switch the buffered annuity into his or her name, continue enjoying the benefit of compound tax-deferred growth, and take out RMDs using his or her life expectancy or a payout option that provides income for a specified period of time, or

(d) exchange the inherited annuity to another annuity if it is more beneficial to his or her specific situation, continue enjoying the benefit of compound tax-deferred growth, and take out RMDs using his or her life expectancy or a payout option that provides income for a specified period of time. *

* Note: Options (b), (c), and (d) potentially may help your spouse significantly reduce taxes on inherited qualified buffered annuities by deferring taxes until later years when he or she may be in a lower tax bracket and withdrawals may be taxed at a lower rate. ******

Non-Qualified (non-IRA) Annuities

A spousal beneficiary may elect to:

(1) receive a one-time lump sum payment, or 

(2) select from options (b), (c) or (d) above. *

* Note: Options (b), (c) and (d) are known as a “Non-Qualified Stretch” and potentially may help your spouse significantly reduce taxes on inherited non-qualified buffered annuities by deferring taxes until later years when he or she may be in a lower tax bracket and withdrawals may be taxed at a lower rate. *******

Non-Spousal Beneficiaries And Inherited Buffered Annuities

The taxes a non-spousal beneficiary may owe will be dependent upon the distribution options he or she chooses when he or she inherits your annuity. Any taxes owed on distributions are deferred until he or she receives them.

Qualified (IRA) Annuities

A non-spousal Beneficiary may elect to:

(a) receive a one-time lump sum payment, or

(b) distribute 100% of inherited qualified BFAs within 10 years which may help significantly reduce taxes by deferring taxes until later years when he or she may be in a lower tax bracket. ********

Non-Qualified (non-IRA) Annuities

A non-spousal beneficiary may elect to:

(a) receive a one-time lump sum payment; 

(b) switch the BFA into his or her name, continue enjoying the benefit of compound tax-deferred growth, and take out RMDs using his or her life expectancy or a payout option that provides income for a specified period of time, or

(c) exchange the inherited annuity to another annuity if it is more beneficial to his or her specific situation, continue enjoying the benefit of compound tax-deferred growth, and take out RMDs using his or her life expectancy or a payout option that provides income for a specified period of time. *

* Note: Options (b) and (c) are known as a “Non-Qualified Stretch” and potentially may help your non-spousal beneficiary significantly reduce taxes on inherited non-qualified BFAs by deferring taxes until later years when he or she may be in a lower tax bracket. *********

* Surrender charges and other contract charges may apply that can reduce the principal if liquidated before maturity.

** Guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.

*** The insurance company charges no liquidation penalty if held until maturity; however, similar to assets held in an IRA, BFAs are typically designed for long-term tax-deferred investing. If you take withdrawals before you reach age 59 1/2, then you may have to pay a 10% early withdrawal federal tax penalty in addition to ordinary income taxes. You should request and review a Product Prospectus, for complete information and restrictions that may apply, prior to making any decision to purchase a BFA product.

**** The purchase of an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefits. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to recommending the purchase of an annuity within a tax-qualified retirement plan. In addition to surrender charges, withdrawals are subject to income tax.

*****, ******, *******, ********, ********* Please consult with and rely on your own legal or tax advisor and refer to your contract.